Stock Takes: Diligence needed

Companies that are doing well like Auckland International Airport are not seeing much of a positive reaction in their share prices. Photo / Dean Purcell

DILIGENCE NEEDED

Diligent's three-day trading halt while it deliberates on what to do over a muck-up in the way it has awarded options to its executives is not a good look for the company.

While the cancellation of some of the stock options should be earnings positive once the company figures out another way to compensate its directors the overall effect should be neutral on the financial position of the company.

With its strong performance and growth in recent years shareholders are unlikely to be unhappy about executives being rewarded for that.

But the fact remains that the company did breach the caps on awarding options. Given Diligent had a less than perfect start to its sharemarket listing these errors are something that will be viewed in a negative light by some.

Shares in Diligent last traded at $5.35.BITTER PILL Shareholders are not taking bad news very well this reporting season. Three companies - Rakon, Comvita and Skellerup - have all suffered major blows to their share prices after releasing profit downgrades.

Rakon is down from 38c to 25c since its downgrade was announced on February 13.

Honey-product maker Comvita plunged from $3.90 to $3.46 on its forecast on Tuesday, although it has since recovered some of that ground.

Some say the firm was already seeing warning signs back in November.

When Comvita released its half-year result in November it noted that honey was in short supply pushing up the price sharply, constraining sales growth and margins.

There are also concerns that where one downgrade is made another will follow.

But chief executive Brett Hewlett seems confident that will not be the case.

"We remain confident that the reasons for the downturn are isolated and that mitigation measures are already in place. Most importantly, the current strategy still holds with business on a path of strong earnings growth beyond this financial year."

Shares in Comvita closed down 8c at $3.60 yesterday.RUBBER DOWN Skellerup shares also fell close to 7 per cent in early trading yesterday after the company downgraded its full-year net profit forecast from $22-24 million to $20 million after a slow start to its financial year.

Chairman Sir Selwyn Cushing said the 2013 financial year was shaping up to be a tougher one for the company than the previous year but he also remained upbeat.

"Our customers have been impacted by unpredictable weather patterns and a slowdown in activity, but as we have seen in the past, orders can quickly turn and we must be ready for this. Skellerup is a good company with diligent and committed management. I am confident in its ability to outperform the market in the foreseeable future. The signs of recovery are starting to show."

Shares in the rubber maker closed down 11c yesterday at $1.53.UNREWARDED Conversely, companies that are doing well are not seeing much of a positive reaction in their share prices. One market source said it seemed that the good news had already been priced in. An example of this was yesterday's Auckland International Airport result.

Its six months to December 31 net profit was up 11.3 per cent to $76.91 million allowing the company to lift its full-year guidance from $143-150 million to $145-153 million.

The company's shares closed steady yesterday at $2.705.

Given the good result it also seems strange that the New Zealand Superannuation Fund chose to sell a large chunk of its shares in the airport just days ahead of the announcement.

Last Friday the $20 billion fund sold 100 million shares in a private placement underwritten by UBS, netting itself $276 million and reducing its share from 10.1 per cent to 2 per cent.

The shares were sold at $2.76 - a significant discount to the pre-sell-down trading price of $2.94.

The airport's share price spiked up right before the deal was done and has since fallen below the $2.76 sell-down price.

Sources say many of the shares were bought by hedge funds who then dumped them back on the market to make a quick gain.

The Super Fund's reasoning for its sell-down was a desire to reduce its overweight position in the stock while making the most of the strong sharemarket.

The airport was its largest listed shareholding in New Zealand.

BEAUTY PARADE

Stock Takes hears the beauty parade for the Mad Butcher float has begun with its sellers out in full force visiting brokers and fund managers ahead of its back-door listing.

Around $40 million is expected to be raised through the initial public offering which was initially targeted to be completed in March but now seems more likely to go ahead in early April.

Stock Takes understands it's not the first time Mad Butcher owner Michael Morton has tried to sell the business. Three years ago a group of former retail executives looked at it but couldn't reach a price with Morton. Apparently there was a $10 million discrepancy between what they wanted to pay and what he thought it was worth. The $40 million he has secured now is even higher than what he wanted back then.

Veritas Investments will buy the business with $20 million in cash and the rest in shares so Morton will still have some skin in the game but Stock Takes wonders how long it will be till he sells out completely.

Analysts will be looking closely at how much earnings have grown in the last few years and where future earnings growth will come from.

MORE ACTION

The Super Fund will likely be making more moves like its Auckland Airport sell-down with its decision to switch a chunk of its money from an internally managed passive portfolio to an active one.

The fund currently has around $250-$500 million in its passive portfolio which invests in the top 50 listed New Zealand companies proportional to their weighting in the index.

But this week it appointed Tim Mitchell to the role of manager, New Zealand equities, to begin its transition to taking a more active approach to where it puts the money.

But don't expect to see any major changes soon. Mitchell said he did not expect to be making any active investments until 2014.

"In terms of transitioning it's very likely to take the rest of the calendar year to put a team in place and put together the research process."

He said the new high-conviction portfolio would most likely consist of fewer than 20 stocks.

The Super Fund already outsources the management of some of its money to Milford Asset Management and Devon Funds Management.

Mitchell said the aim wasn't to better what they were doing.

"Those guys are doing well for us. We think there is value in getting diversity of active management."

The fund has up to $1 billion invested in New Zealand shares.

"It's very unlikely it could all be managed by one group."

The last time Mitchell was involved in active funds management in the private sector was at Colonial First State in 1999.

He was the chief investment officer there. He wasn't doing stock picking but did oversee all the teams that did, as well as being part of an operation to convert a passive portfolio of investments to active. "I wouldn't hold myself up as a stock picker. My focus is on building the team." He will hire two new analysts in the next few months.

It doesn't sound like the role is a long-term move for Mitchell and he admits part of his role is to develop and mentor a successor.

Other industry players describe Mitchell as a smart guy and one of the stalwarts at the Super Fund. He has been there since 2002 when it was set up.

The Super Fund tried to recruit a New Zealand equities manager last year but didn't appoint anyone.

Market sources say the nature of the role changed during the process and it turned out to be more junior than people were expecting - thus the salary was not enough to tempt any private sector managers to take it up.